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THE EXCHANGE RATE KEY DEFINITIONS AND CONCEPTS 1. How is the exchange rate defined? The exchange rate is the price of a unit of foreign currency in terms of the domestic currency. In the Philippines, for instance, the exchange rate is conventionally expressed as the value of one US dollar in peso equivalent. For example, US$1 = P44.00. In every exchange rate quotation, therefore, there are always two currencies involved. 2. Why is the exchange rate important? The exchange rate is important for several reasons: It serves as the basic link between the local and the overseas market for various goods, services and financial assets. Using the exchange rate, we are able to compare prices of goods, services, and assets quoted in different currencies. Exchange rate movements can affect actual inflation as well as expectations about future price movements. Changes in the exchange rate tend to directly affect domestic prices of imported goods and services. A stronger peso lowers the peso prices of imported goods as well as import-intensive services such as transport, thereby lowering the rate of inflation.For instance, an increase in the value of the peso from US$1:P50 to US$1:P40 will lower the price of a $1 per liter gasoline from P50.00 (P50 X $1) to P40.00 (P40X $1). Exchange rate movements can affect the countrys external sector through its impact on foreign trade. An appreciation of the peso, for instance, could lower the price competitiveness of our exports versus the products of those competitor countries whose currencies have not changed in value. The exchange rate affects the cost of servicing (principal and interest payments) on the countrys foreign debt. A peso appreciation reduces the amount of pesos needed to buy foreign exchange to pay interest and maturing obligations.

3. How is the exchange rate determined? Under the system of freely floating exchange rates, the value of the dollar in terms of the peso, like any commodity or service being sold in the market, is determined by the forces of supply and demand. Under a fixed exchange

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rate system, a par value rate is set between the peso and the dollar by the central bank. The par value may be adjusted from time to time. 4. How does the exchange rate change? Under a floating exchange rate system, if more dollars are demanded than are offered, the price of the dollar in terms of the peso will tend to increase; that is, it will cost more pesos to acquire one dollar. If, on the other hand, more dollars are offered than are demanded, the value of the dollar in terms of the peso will tend to decrease; that is, it will cost less pesos to acquire one dollar. In contrast, under a fixed rate system, a change in the exchange rate is effected through an official announcement by the central bank. 5. What is the countrys foreign exchange policy? At present, the country's exchange rate policy supports a freely floating exchange rate system whereby the Bangko Sentral ng Pilipinas (BSP) leaves the determination of the exchange rate to market forces.Under a market-determined exchange rate framework, the BSP does not set the foreign exchange rate but instead allows the value of the peso to be determined by the supply and demand of foreign exchange. Thus, the BSPs participation in the foreign exchange market is limited to temper sharp fluctuations in the exchange rate. On such occasions of excessive movements, the BSP enters the market mainly to maintain order and stability. When warranted, the BSP also stands ready to provide some liquidity and ensure that legitimate demands for foreign currency are satisfied. 6. How is foreign exchange traded in the market? In the Philippines, banks trade foreign exchange using an electronic trading platform called the Philippine Dealing and Exchange Corp. (PDEx) through any of the following ways: Reuters or Bloomberg dealing, over-the-counter, or via brokers. The PDEx captures all spot transactions (which involve the purchase or sale of a foreign currency for immediate delivery, i.e., within one day for US dollars and within two days for other convertible currencies), done through any of these transaction vehicles. Banks trade for their clients, as well as for their own accounts. When they trade for their own accounts, banks follow the guidelines set by the BSP.

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7. How does one judge whether the exchange rate is at an appropriate level or not? One way of judging the appropriate level of the exchange rate is by looking at the trend in the real effective exchange rate (REER) of the peso versus a basket of currencies. This measure takes into account not only the nominal exchange rate movements but also the relative inflation rates among trading and competing countries. As such, the REER is a more comprehensive measure of external price competitiveness. The BSP looks at three currency baskets: major trading partners (MTPs) composed of the US dollar, Japanese yen, Euro and UK pound; broad basket of competitor currencies consisting of the Singapore dollar, South Korean won, New Taiwan dollar, the Malaysian ringgit, Thai baht, Indonesian rupiah, and Hong Kong dollar; and narrow basket of competitor currencies which include the Malaysian ringgit, Thai baht, and Indonesian rupiah. An increase in the pesos REER index (i.e., from a base year where the index is equivalent to 100) denotes a real appreciation and consequent loss in external price competitiveness, while a decrease translates to a real depreciation and corresponding gain in external price competitiveness. On 26 March 2013, the BangkoSentralngPilipinas (BSP) released three new indices which measure the nominal and real effective exchange rates (EER) of the peso relative to the currencies of the following groups of countries: 1) all major trading partners of the Philippines covering merchandise exports and imports;1 2) trading partners in advanced countries;2 and 3) trading partners in developing countries.3 The methodology used for calculating the new indices was also revised as the BSP shifted from arithmetic to geometric formulation and from base year to chained indices. The new peso EER indices, which will replace (starting 2014) the present EER indices that the BSP currently monitors, wouldenable BSP to gauge more objectively the overall movements in the exchange rate of the peso across currencies, where an increase in the indices means an overall appreciation of the peso against the basket of currencies (thus a loss in the
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The major trading partners of the Philippines are defined as those which accounted for at least one percent share of the total merchandise exports and imports of the Philippines for the past five years (20072011). Based on this criterion, fourteen major trading partners of the Philippines are identified: United States, Euro Area, Japan, Australia, China, Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia,SaudiArabia,UnitedArabEmirates,andThailand. 2 TradingpartnersinadvancedeconomiesincludetheUS,Japan,Euroarea,andAustralia. 3 Trading partners in developing economies include China, Singapore, South Korea, Hong Kong, Malaysia, Taiwan,Indonesia,SaudiArabia,UnitedArabEmirates,andThailand. DepartmentofEconomicResearch 3

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external price competitiveness of the country) while a decrease indicates otherwise. 8. How does one measure the volatility of the peso? One way of measuring the volatility of the peso is through the coefficient of variation (COV), which is the ratio of the standard deviation and the average exchange rate of the peso for a given period. A low coefficient of variation indicates a stable peso while a high coefficient of variation reflects a volatile peso. 9. What measures are undertaken by the BSP to maintain order and stability in the foreign exchange market? The BSP uses three general tools to operationalize the exchange rate policy, namely: 1) participation in the foreign exchange market; 2) monetary policy measures; and 3) foreign exchange regulations. The BSP participates by buying and selling foreign exchange in the foreign exchange market to ensure order and temper destabilizing swings in the exchange rate. It does not set out to reverse the underlying trend of the peso, whether it is appreciating or depreciating; rather, its objective is to smooth out volatility in the exchange rates. Assume that there is an artificially strong demand for dollars which is causing the exchange rate to weaken. The BSP can quell speculation by selling dollars to moderate the depreciating trend. If there is an artificially strong supply of dollars relative to demand in the market, the BSP can soften the appreciation of the peso by buying dollars. If the exchange rate movement threatens to move inflation rate outside its target range, the BSP also uses monetary policy measures, including adjusting the key policy rates or the interest rates it charges for its borrowing and lending activities. For example, in periods of weakening pressure on the peso, increases in interest rates tend to dampen the demand for dollars. As a result, the depreciation pressure on the peso eases. However, any such interest rate action needs to be consistent with the price stability objective of the BSP. The BSP has also combined foreign exchange intervention and monetary measures with market-based foreign exchange regulations to prevent major exchange rate volatility.For example, during the recent episodes of strong foreign exchange inflows, the BSP pursued liberalization of the countrys existing foreign exchange regulatory framework,particularly pertaining to outward investments, foreign exchange swaps, capital movements as well as banks foreign exchange positions. The reforms allowed individuals and businesses greater access to foreign exchange for outward investment and

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over-the-counter transactions. By making the FX environment more open, some of the pressure on the exchange rate could be alleviated. RECENT DEVELOPMENTS IN THE EXCHANGE RATE 10. How has the exchange rate moved since 2012 and what were the factors behind the movement? In 2012, the peso averaged P42.23/US$1, appreciating by 2.49 percent from the P43.31/US$1 average in 2011.4 The strength of the peso was primariliy due to strong inflows of OF remittances, net portfolio investments, and foreign direct investments (FDI).5Likewise, in terms of end-of-period levels, the peso appreciated by 6.24 percent to P41.19/US$1 at endDecember 2012, from P43.93/US$1 from the same period in 2011. In 2013, the peso averaged weaker in the second quarter at P41.78/US$1, depreciating by 2.65 percent from the previous quarters average of P40.71/US$1. Meanwhile, on a year-on-year basis, the peso appreciated by 2.32 percent from the P42.78/US$1 average in the second quarter of 2012. The pesos weakening was due mainly to repricing of risk fuelled by uncertainty about the exit from monetary policy stimulus in the US. Nonetheless, the continued strong foreign exchange inflows from OF remittances6and the countrys sound macroeconomic 7 fundamentals tempered the further depreciation of the peso. The peso started weak in April to average P41.14/US$1 from P40.71/US$1 in March. The geopolitical tension in North Korea, along with the protracted recession on the euro zone, dented investor confidence on riskier emerging market assets such as peso-denominated instruments. The peso depreciated further in May as it averaged P41.30/US$1 due to the increase in U.S. bond yields which eroded the appeal of riskier, high-yielding assets including Philippine bonds. The pesos depreciating trend persisted as it averaged P42.91/US$1 in June on lingering concerns over the US Feds unwinding of its QE3 program, along with liquidity concerns in China which prompted investors flight to US safe-haven assets such as corporate bonds and equities.8
Dollarratesorthereciprocalofthepesodollarrates(basedonreferencetimedata)wereusedto computeforthepercentagechange. 5 Remittances from overseas Filipinos (OFs) coursed through banks for 2012 expanded by 6.3 percent to US$21.4billionrelativetotheyearagolevelofUS$20.1billion.Meanwhile,portfoliotransactionsin2012 reached US$ 18.5 billion, the highest on record in the last 10 years. The figure reflected a 12.0 percent growthovertheUS$16.5billionlevelin2011,fueledbyrenewedinterestinPSElistedsecurities,coupled withsustainedinvestorconfidenceinthecountryssolidmacroeconomicfundamentals. 6 PersonalremittancesfromoverseasFilipinos(OFs)continuedtoriseinApril2013,registeringa7percent yearonyeargrowthtoreachUS$1.9billion. 7 RealGDPexpandedby7.8percentinthefirstquarterof2013from6.8percentinthepreviousquarter. 8 CapitalFlowstoEmergingMarketEconomies,(26June2013).InstituteofInternationalFinance DepartmentofEconomicResearch 5
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11. How did the peso perform on a tradeweighted basis? On a real trade-weighted basis, the peso gained external price competitiveness against the basket of currencies of major trading partners (MTPs) and competitor countries in both the broad and narrow series during second quarter of 2013.9 This developed as the pesos nominal depreciation more than offset the widening inflation differential relative to these baskets of currencies. This resulted to a decrease in the real effective exchange rate (REER) index of the pesovis-a-vis the MTPS, broad, and narrow competitor countries by 0.3 percent, 0.5 percent, and 1.0 percent, respectively.10 On a year-on-year basis, the peso lost external price competitiveness against the basket of currencies of MTPs due to the combined effects of the pesos nominal appreciation and the widening inflation differential against this currency basket. As a result, the peso appreciated in real terms by 8.4 percent. Likewise, the peso lost external price competitiveness against competitor countries in both the broad and narrow series. Mainly behind this development was the nominal appreciation of the peso which more than offset the impact of narrowing inflation differential against these currency baskets. This led to a real appreciation of the peso against the broad and narrow baskets of competitor countries by 3.6 percent and 4.0 percent, respectively. 12. Has the peso been volatile? In 2012, the peso volatility(as measured by the coefficient of variation of the pesos daily closing rates) slightly increasedto 1.95 percentfrom1.23 percent a year ago. In the first quarter of 2013, volatility was lower at 0.26 percent compared with 0.50 percent in the fourth quarter of 2012 due to market perception that some major near-term downside risks, particularly relating to the the US fiscal cliff and the euro area crisis, have eased.11 Meanwhile, the coefficientof variation of the pesos daily closing rates was higher at 2.20 percent in the second quarter, reflecting the increase in asset price volatility during the recent sell-off.

The basket of the major trading partners is composed of the currencies of US, Japan, the Euro area and the United Kingdom. The broad basket of competitor countries comprises the currencies of Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia and Hong Kong while the narrow basket is composed ofthecurrenciesofIndonesia,MalaysiaandThailandonly. 10 The REER index represents the Nominal Effective Exchange Rate (NEER) index of the peso, adjusted for inflation rate differentials with the countries whose currencies comprise the NEER index basket. A decrease in the REER index indicatessome gainintheexternal price competitiveness ofthepeso,whilea significant increase indicates the opposite. The NEER index, meanwhile, represents the weighted average exchangerateofthepesovisvisabasketofforeigncurrencies. 11 The COV of the pesos daily average exchange rates were used to compute for volatility in previous reports. DepartmentofEconomicResearch 6

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13. What is the medium-term outlook on the peso? The exchange rate is expected to be generally stable in the medium term, supported by increased levels of international reserves and sustained inflow of foreign exchange from OF remittances and BPO receipts.The favorable macroeconomic fundamentals and credit ratings upgrade awarded to the Philippines are also expected to encourage inflows of foreign capital. However, the foreign exchange rate remains highly sensitive to changes in market sentiment. For instance, the recent movement of the peso has been influenced by investors reassessment of global risk amid concern on the timing and scale of the anticipated tapering of monetary easing by the US Federal Reserve.

POLICY RESPONSES BY THE BSP 14. What were the recent monetary policy and foreign exchange measures undertaken by the BSP? Monetary Policy Measures During its 13June 2013 meeting, the Monetary Board maintained the BSP's key policy interest rate at 3.50 percent for the overnight borrowing or reverse repurchase (RRP) facility. At the same time, it kept the rate for the overnight lending or repurchase (RP) facility at 5.50 percent. It also decided to set the interest rate on RRPs at 3.50 percent for all tenors. The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also left unchanged accordingly. The reserve requirement ratios were maintained as well. The Monetary Boards decision to maintain the policy interest rates at their current levels is based on its assessment that the inflation environment continues to be benign. Inflation expectations also continue to be firmly anchored. Furthermore, the modest pace of global economic activity could continue to temper the broad outlook for inflation. Foreign Exchange Measures As a continuation of the foreign exchange liberalization program, the BSP approved on 15 January 2009 the third phase of reforms, which includes the liberalization/streamlining of rules on foreign borrowings of private banks for relending purposes and the registration of inward foreign portfolio investments.19 The third phase of foreign exchange regulatory reforms also includes all the provisions in the first and second phases of reforms initiated in 2007 as well as the provisions that are intended to improve monitoring of foreign exchangeflows and to formalize/clarify existing practices.
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Moreover, the MB approved on 23 April 2009 the streamlining of the documentation requirements and other reforms on the sale of foreign exchange by foreign exchange dealers/money changers (FXDs/MCs). The streamlining of the documentation requirements will make it possible for residents with foreign loans/foreign currency loans as well as foreign investors that chose not to seek BSP approval and/or registration of the loans/investments to source their foreign exchange requirements from FXDs/MCs without necessarily compromising compliance with anti-money laundering regulations. The MB approved further liberalization of foreign exchange regulations (fourth phase) on 28 October 2010. These changes resulted from the continuing efforts by the BSP to keep the foreign exchange (FX) regulatory framework responsive to current economic conditions and to align it with the policies of neighboring countries in the region to maintain the competitiveness of the Philippines FX regime. These amendments were expected to encourage greater FX outflows and thus temper the domestic currencys appreciating trend against the US dollar. Furthermore, on 10 November 2011, the Monetary Board of the BSP approved several amendments to existing foreign exchange (FX) regulations. This is part of the Banks continuing efforts to keep the FX regulatory framework responsive to and attuned with current economic conditions and make it easier for the general public (both residents and nonresidents) to transact in FX within the banking system. In the process, this is expected to improve the overall investment climate in the country. The amendments include the following measures: Allow within a three (3) month period (December 2011 to February 2012), unregistered private sector foreign loans to be paid using FX to be purchased from authorized agent banks (AABs) and/or their subsidiary/affiliate foreign exchange corporations (AAB-forex corps). Expand the list of non-trade current account transactions for which FX may be freely purchased from AABs or AAB-forex corps without prior BSP approval. Allow AABs and AAB-forex corps to sell FX for advance payment of imports regardless of amount, without prior BSP approval but subject to standard document requirements. Lift the requirements to: (i) inwardly remit dividends/earnings/ divestment proceeds from outward investments funded by foreign exchange purchased from AABs or AAB-forex corps; and (ii) reinvest these funds within 30 banking days from receipt.

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Lift the requirement to convert to pesos the FX funding of foreign direct equity investments to qualify for registration with the BSP. Exempt from the prior BSP approval requirement foreign/FCDU loans that will finance infrastructure projects that are included in the Governments list of Public Private Partnership (PPP) projects. Lift the 3-day period within which FX purchased for import payments and deposited in FCDU accounts must be remitted to the offshore beneficiary. Lift the prior BSP approval requirement for extensions beyond one (1) year of the validity of Letters of Credit (LCs). In addition, on 28 October 2011, The Monetary Board increased the market risk weight of Non-Deliverable Forwards (NDFs) to reflect the potential systemic risk from NDF transactions as a result of the increased volatility in the foreign exchange markets. NDFs were assigned a higher risk weight equivalent to a CAR of 15.0 percent from 10.0 percent effective on 1 January 2012. On 13 July 2012, the BSP issued Memorandum No. M-2012-034 to discourage funds from foreign sources from being placed in its Special Deposit Account (SDA) facility.In addition, the spread of the SDA rates over the RRP rate was also reduced to fine-tune the pricing of the product consistent with the decline in global interest rates. On 26 December 2012, the BSP imposed limits/caps on banks NDF activities which include: (1) limiting local banks NDF exposure to 20.0 percent of capital; (2) limiting local branches of foreign banks NDF exposure to 100.0 percent of capital; and (3) forbidding pre-termination of NDF contracts. ISSUES ON FOREIGN EXCHANGE 15. Why did the BSP adopt a floating rate system? The floating exchange rate system was adopted in 1970 because the government considered that occasional, large fluctuationstypical of the fixed exchange rate systemare more costly, destabilizing and disruptive to the economy than the more frequent but more gradual changes that may occur in a free float. The floating rate system is consistent with the current regime's national strategy of achieving external competitiveness through efficiency, which is also a central theme of the recent bold liberalization efforts. In terms of exchange rate policy, such efficiency is injected into the economy by
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basically leaving exchange rate determination to the market forces of supply and demand. 16. Why not fix the exchange rate? Or adopt a dual or multiple exchange rate system? Under a system of fixed exchange rate, the central bank commits to sell or buy any amount of foreign currency demanded in excess of what can be supplied by the market or offered for sale in excess of what is demanded, to keep the official exchange rate at a certain level. For a small open economy such as the Philippines, large capital flows can occur at any time. In times of massive dollar inflows, the monetary authorities must buy the excess dollars to keep the foreign exchange at the desired level. In so doing, reserves are accumulated but pesos are released into the system from which inflationary pressures could result. Siphoning off excess pesos for example (through the sale of government securities in the BSP's portfolio) could entail substantial cost to the BSP in terms of the difference between the cost of borrowing to pay for the dollar purchases and the return to the BSP on the foreign exchange purchases. Apart from the fiscal costs of sterilization, the sale of government securities is likely to push up interest rates and attract additional foreign capital inflows into the economy. On the other hand, in times of massive dollar outflows, monetary authorities must sell dollars to accommodate any excess demand. In so doing, reserves are drawn down. If the massive outflow is sustained, reserves will diminish. Before this happens, the central bank is forced to reset the official exchange rate, often opening itself to exchange losses. Thus, fixing the exchange rate places a heavy burden on monetary authorities in terms of reserve and liquidity management. A dual or multiple exchange rate system is discriminatory and distorts resource allocation. If the government sets a high rate for exporters and OFs, it will have to subsidize the difference between market rates and the fixed higher rate. However, this is not feasible since government revenues are not yet sufficient to cover our annual budget. On the other hand, private banks will not be willing to do this as it will incur losses in the process of paying higher than prevailing market exchange rates.

17. Is the current exchange rate policy in line with the inflation targeting approach to monetary policy?

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The BSPs adherence to a freely floating exchange rate or a marketdetermined exchange rate system anchors its commitment to its Constitutional mandate to maintain price stability. It is also consistent with the inflation targeting (IT) framework of our monetary policy which demands disciplined commitment to participate in the foreign exchange market only in well-defined circumstances, such as when there is a need to smooth out exchange rate volatility which can threaten our inflation target. The BSPs participation in the foreign exchange market during such a situation is compatible with price stabilization since fluctuations in the exchange rate tend to feed directly into domestic prices of imported goods and services, and indirectly, through the prices of goods and services that use imported inputs. The increase in prices of both the imported and import-intensive goods, in turn, leads to demands for wage hikes and transport fare adjustments, among other things. Through this channel, exchange rate movements affect both the actual inflation and inflation expectations. 18. Why can't the BSP intervene more heavily during periods of high peso volatility? Heavy intervention cannot be sustained for a long period of time because it could create problems for monetary policy. To sterilize intervention and mop up excess liquidity, the central bank would have to either raise policy rates and/or undertake open market operations. These policy actions may not be sustainable because they are costly to central banks. High interest rates required to siphon off liquidity would give countries with fiscal difficulties and/or weak macroeconomic conditions very little room to maneuver. Moreover, raising interest rates is likely to result in a further increase in foreign capital inflows which may necessitate more sterilization, resulting in a vicious cycle.

On the other hand, unsterilized interventions may lead to unwarranted monetary expansion and generate upward pressure on prices. This runs counter to a central banks mandate to maintain price stability.

19. What is the view of the BSP regarding the imposition of capital controls?

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Imposing strict capital controls poses more costs than benefits. First, there are administrative difficulties that must be hurdled to implement effectively these restrictions. The tax on international transactions should be universally implemented to prevent the creation of tax arbitrage opportunities. Some difficulties in implementing the tax could also arise due to advances in technology and the growing sophistication of financial instruments, which allow investors to circumvent controls and/or taxation. Second, the imposition of controls hampers the efficient allocation of capital across countries. Finally, the re-imposition of controls would send negative signals to investors and adversely affect our access to international capital markets and our ability to attract foreign investments.

20. What are the advantages and disadvantages of a firm peso? On the one hand, a firm peso confers benefits to the economythe consumers in general (by tempering the general rise in the prices of goods and services or inflation arising from increases in international prices of imported or import-based commodities), importers, Filipinos who travel or invest abroad, and those who pay for foreign loans (including the government). Overall, a firm peso: Helps dampen inflationary pressures; Translates to lower debt servicing; Enables the BSP to build up international reserves; and Allows prepayment of foreign exchange obligations.

On the other hand, a firm peso could have some negative impact on certain sectors, including some export-oriented companies, domestic producers of import substitutes, tourism sector, foreign investors, and creditors who had lent money in foreign currency, and overseas Filipinos and their families. 21. What are the advantages and disadvantages of a peso depreciation? A weak peso can improve the external price competitiveness of Philippine products, thereby increasing the countrys export earnings. The peso equivalent of OF remittances in foreign currencies will also increase as the peso depreciation will mean morepesos in exchange of one foreign currency unit (e.g., US$1). Moreover, tourism and investment activities will increase as it will be less costly and more desirable for foreigners to travel and invest in the Philippines.

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However, peso depreciation can also increase inflationary pressures as it would cost more pesos to buy imported products and raw materials such as oil and rice. 22. What is the impact of currency wars on global financial markets? What have been the policy responses? Currency wars refer to competitive currency devaluations among countries. An example of this is the situation in which substantial monetary policy easing in many of the major advanced countries to support their economies has fueled a downward slide in the value of their currencies, while emerging economies (including many Asian countries) attempt to arrest the appreciation of their own currencies (e.g., against the Japanese yen) through a variety of measures. Policy responses by emerging economies to cope with the risks brought about by large and destabilizing capital inflows have included exchange rate appreciation, macroprudential measures and tighter fiscal policy. However, there is significant cross-country differences in the extent of exchange rate flexibility and the scope for policy responses in some countries receiving large inflows. A consensus among advanced- and emerging-economy authorities could preserve orderly conditions in the global foreign exchange market while taking into account the new normal environment in which weak growth in the advanced economies is expected to persist. Competitive currency devaluations are a beggar-thy-neighbor policy that can ultimately destabilize the still weak global recovery. A sharp depreciation in the value of a major currency could result in the adoption of protectionist policies by other countries in response. This could destabilize global financial markets, pulling asset values away from fundamentals, and eventually hurt businesses and households worldwide. However, regional and international cooperation may play a role in addressing these concerns. In a G-20 meeting held in Moscow on 16 February 2013, finance ministers echoed support to refrain from competitive devaluation and reiterated their commitment to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments.12 23. Is there a possibility for the establishment of a single Association of Southeast Asian Nations (ASEAN) currency? Integration within the Asian region has been progressing significantly in recent years. This may be observed from the rise in intra-regional trade and flows of investments within the region. There are also a number of initiatives
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which support the greater linkage between economies. These initiatives include the establishment of free trade agreements, the Chiang Mai Initiative Multilateralization and various efforts to develop the regional bond market. Amidst these initiatives, there is also a discussion on the possibility of the region adopting a single currency and eventually forming a monetary union with one central bank for the region. This issue has been examined by economic authorities in the region and it has been found that the ASEAN is not ready yet to adopt a common currency in the near future. This is due to lack of macroeconomic convergence, inadequate regional institutional framework, low intra-regional trade and concerns over the potential loss of sovereignty over national policymaking. Furthermore, more than the economic prerequisites, the formation of a common currency area requires political will and social consensus. At present, these factors need to be strengthened. The policymakers in the region are focusing instead on deepening integration through trade liberalization and financial market developments. While the adoption of a single currency may be difficult in the near to medium term, its eventual emergence cannot be discounted.

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